Why Give a Damn:
Entrepreneurs usually think of themselves as businesspeople or missionaries (or in the case of most Unreasonable Fellows, both!). But focusing on the bottom line or the cause isn’t the best way to make your startup successful. In fact, entrepreneurs need to think of themselves as scientists.
The author of this post, Chris Yeh, has been building internet businesses since 1995 and currently serves as the VP of Marketing for PBworks, as well as a General Partner at Wasabi Ventures.
As an investor, my first preference is to invest in a sure thing. I want the game to be rigged in my favor so that I can’t lose.
Sadly, this is seldom possible. Early-stage investing almost always involves risk and uncertainty. But it’s important to distinguish between the two.
“Risk, as first articulated by the economist Frank H. Knight in 1921, is something that you can put a price on. Say that you’ll win a poker hand unless your opponent draws to an inside straight: the chances of that happening are exactly 1 chance in 11. This is risk. It is not pleasant when you take a “bad beat” in poker, but at least you know the odds of it and can account for it ahead of time. In the long run, you’ll make a profit from your opponents making desperate draws with insufficient odds.
Uncertainty, on the other hand, is risk that is hard to measure. You might have some vague awareness of the demons lurking out there. You might even be acutely concerned about them. But you have no real idea how many of them there are or when they might strike. Your back-of-the-envelope estimate might be off by a factor of 100 or by a factor of 1,000; there is no good way to know. This is uncertainty. Risk greases the wheels of a free-market economy; uncertainty grinds them to a halt.”
In the startup world, your job as an entrepreneur is to convert uncertainty into risk. Even if you can’t give me a sure thing, I’m willing to take a defined risk at the right price. If the outcome is completely uncertain, most rational investors will simply wait for you to resolve the uncertainty into risk.
If you view your startup through the lens of the businessperson, your focus is probably to assemble enough resources to eliminate the risk. This is impossible; risk always exists, and making a bet that’s too big to fail is one of the surest ways to invite failure.
If you view your startup through the lens of the missionary, your focus is to convince people of the unassailable righteousness of your cause. This too is impossible; investors are skeptics, and you’ll never gather enough true believers who are willing to ignore the economics of the deal.
The right way to convert uncertainty into risk is to think like a scientist. Your goal is to hack away at the penumbra of uncertainty with well-designed experiments. As you make key decisions, the question to ask yourself isn’t, “Will we make money?” or “Does this advance the cause?” The question to ask is, “What will we learn?”
If you prioritize learning, you’ll be able to reduce uncertainty and position your startup to raise money. If an investor knows what they’re betting on when they invest in your startup, they’re far more willing to commit, and far more capable of helping you achieve your goals.
An Unreasonable Challenge:
Examine your startup from the perspective of a scientist. What are your key hypotheses? What are the fastest, cheapest ways to test those hypotheses? If you think like a scientist, you’re far more likely to make progress on your business and your cause.